Stock exchanges take great care to ensure that their 'price discovery
mechanism' – another word for economist Adam Smith's Invisible Hand
remains untampered with. To do this, they need to ensure that all buy orders
placed online match with the best possible sell orders in terms of price and
quantity. This ensures that the resulting price, volume and volatility of a
security is the best possible representation of the market participant's mood.
The National Stock Exchange, for example, operates on an automated order-driven
trading system called National Exchange for Automated Trading (NEAT).
This system offers the online market participants anonymity along with control
on the type of orders placed by them. Every order gets a timestamp and an order
number. Despite automation & anonymity in the order processing algorithms of the
exchanges, the buy and sell orders placed by the same participant can sometimes
match. This results in what is called a Synchronised Trade. Although this trade
is a wash
(not resulting in a change of ownership), it is still recorded as a
legitimate trade by the system.
What is Synchronised Trading?
Securities Appellate Tribunal (SAT) in Securities and Exchange Board of
India (SEBI) vs. Pursarth Trading Company Pvt. Ltd.
 defined it as –
Synchronised trade is a kind of transaction where the seller and buyer execute
the trade for almost the same quantity and price at the same time. It is
important to note that in such a trade, sellers never lose ownership or control
over the security that they trade in.
Most of the times such trades are involuntary. But at times, by matching the buy
and sell orders, a trader or a group of traders, can trade amongst themselves in
high volumes and can intentionally manipulate various indicators of a security
like its price, volume, etc.
Forms of Synchronised tradingSelf Trades
When a trade is executed by an entity, in such a way that the entity is both the
buyer and the seller in that particular trade, it is called a Self-trade 
In this strategy, two people execute the trades in such a way that the purchaser
of the security eventually sells the security back to the original seller, and
as a result, beneficial interest is not changed.
SAT in M/s. Active Finstock Pvt. Ltd. v. SEBI
 explained circular
trading as – A circular trade is a trade where two or more persons join hands
together and start trading in a script among themselves Irrespective of the
number of persons trading, and the number of trades executed by them, the shares
go back into the hands of the first person at the end.
Cross deals take place when a buyer and a seller have a common trading member
(Broker) who executes their trade orders. If the orders punched by the trading
member are such that they have similar price and quantity, and are executed
around the same time then they can match.
When Synchronised Trades are unintentional.
The orders placed by traders could get synchronised without any premeditation or
any mala fide intention on their part. This could be due to the complexity of
the modern markets, the exchange's inefficiency in executing orders or the
prevalence of software-based trading. After looking at some of the conditions
discussed below, it becomes clear to say that synchronised trades in some
capacity are bound to occur as any prudent trader or a trading firm can fall
within the conditions mentioned below –
Algorithm Trading uses software algorithms that evaluate price and other
empirical data, to decide when to place buy and sell orders in order to make a
profit. They are frequently used for arbitrage and inter-day trading, and the
software often places multiple orders in a short span of time to take advantage
of the price difference. Needless to say, not all orders find a match, and
sometimes buy and sell orders from the same algorithm match each other and get
executed by the exchange. Alternatively, when multiple algorithms are deployed
in the market by the same trading firm, these algorithms may end up executing
each other's orders. This happens automatically and with no malevolence on the
part of the firm.
All Exchanges have limitations in the speed of their servers or the amount of
traffic their network can handle and market participants can have limitations in
the bandwidth at which they operate. An exchange may have its servers situated
in one physical location, but the trading terminals which transmit orders to it
may be located the world over. These reasons could cause a 'latency' or a time
delay in transiting the order to the exchange in the first place. This affects
the exchanges ability to match orders and could result in orders piling up or
mismatching of the orders. All this coupled with the high-frequency trading
activity could result in trade synchronisations.
Multiple people in a single firm may trade manually on behalf of the firm with
their independent trading strategies. There are chances that their orders may
get synchronised if they deal in similar securities. This is especially true for
a Proprietary trading firm.
Effects of Synchronised TradingOn the Market
When synchronised trades are executed in high numbers, they start to change the
basic indicators of a script. The perpetrators can increase or decrease in the
price of a script, as they place high volume sell orders with the price of their
choosing, and then execute the orders themselves. On the other hand, due to the
high number of trades entered, the volume of the script increases, and this
shows an increase in the demand for the shares. The main outcome of this
activity is that the perpetrators creates a false market for the script where
its buying and selling activity is taking place at higher than normal prices,
and in higher than normal quantities. SAT has held that it is this effect of
misleading the decisions of genuine investors and tampering with the natural
process of price discovery that makes synchronised trading a fraudulent trade
On the Investors
Investors in the security markets use certain information or indicators to
invest in a script. These modern-day indicators can be very complex; but they
are calculated using very basic information about a script like its price,
volume, earnings, etc. For potential investors to make the right decisions, it
is imperative that this basic information is a true representation of the
market's sentiment; or in other words, the price discovery mechanism of the
market is not contaminated. If it is, then it could expose the investors to an
unmitigated risk on their investments.
On the Brokers
When perpetrators don't wish to manipulate a securities price/volume by using
synchronised trades, they use it to reward their brokers for illegal activities
performed by them. In the 2012 London Interbank Offered Rate (LIBOR) Scandal
, banks manipulated the lending rates with the help of their brokers. Later,
they had to find a way to pay the brokers for their role in this scam. Some of
the banks engaged in self-trading activity, which generated higher than normal
commission fees payable to their brokers. The commission from these self trades
inflated the broker's bills, and they were compensated legally for their
unlawful role in this scam.
Brokers could place buy and sell orders on their behalf of multiple clients
using their own terminal. Some of these orders placed may unintentionally get
synchronised and executed. SEBI in Re. Khandwala Securities Limited
has clarified that due to its KYC Norms for the brokers and the Member-Client
Agreements between the broker and their clients, a broker is duty-bound to know
the investment objective and genuineness of its clients. Also, that brokers have
a duty not only towards their clients but also towards the market in protecting
its order matching mechanism. Thus, brokers can be held liable for synchronised
trades executed by them and it's irrelevant if such a trade deal is negotiated
in advance between the buyer, seller and broker or not.
How are trades established as Synchronised Trades?
Various tests and attendant circumstances are looked at to determine the
existence of synchronised trading activity as given below:
Price, Quantity And Time (PQT) Test
In this test, the price, quantity and time of placing the buy and sell orders
are looked at to establish if the trades are synchronised. A positive PQT Test,
along with the existence of the other circumstances mentioned below, is a strong
indicator of synchronised trading activity.
Connections between Clients and Brokers
In Rajkumar Chainrai Basantani v. SEBI
, SAT held that Circular
Trading is established if commonality of clients and their nexus with the
promoters is proved. When a commonality exists between two market participants
they are called 'Connected Clients' and as far as SEBI is concerned the
connection may be of having a common director, of being an associate company of
the other, of being related parties of each other or merely of being each
other's friends on Facebook. This commonality may exist inter se the clients,
the brokers or various other market participants. SAT emphasises that unknown
persons cannot trade continuously by executing buy and sell orders that
synchronise between them. As a result, it can infer that if trades are
synchronised between the parties continuously, one could say that the parties
are related and the transactions are not bona fide.
Change In Beneficial Ownership
SEBI's Master Circular  defines a beneficial owner as the natural person or
persons who ultimately own, control or influence a client — including those who
enforce ultimate control over a legal person. It could also be the person on
whose behalf a trade is executed. After a garden variety trade is executed on a
stock exchange, the buyer in the trade is not controlled or influenced by the
seller in any manner. As a result, the buyer becomes the true owner of the
securities. However, In a synchronised trading activity the first person never
loses its control and influence on the shares and on the entities that buy and
sell it subsequently. Thus, no transfer of beneficial interest takes place.
Incremental trades are those where there is a steady increase in the price
element of the orders executed between the connected parties, that results in
inflation of the price of the security. If the trades are predetermined and the
volume of shares traded is high enough, incremental trading can drive the price
of the script above the ordinary price determined by the free price discovery
mechanism of the market. In SEBI v. Galaxy Broking Ltd. , it was observed
that incremental trades were executed by connected parties (with an increment of
Rs. 2 each day with reference to previous days closing price) across 11 trading
days. This drove the price of the script from Rs. 70.70 to Rs 107.85, thus
registered an increase of 52.55%.
Capacity to trade in volume
To get the fruits of an illegal synchronisation, the participants have to be in
a position to trade a high number of shares in order to see a difference in the
price of the security in the market. This is a position of influence that not
all the players will have in the market. Minor and infrequent trades that pass
the PQT Test, even if executed by Connected Parties, cannot drive the price or
volume in any direction.
In SEBI vs Active Finstock Pvt. Ltd
.  attendant circumstances
play a key role. Here, SEBI investigated the script of M/s Mazda Fabrics &
Processors Ltd for synchronised trading activity. The entities under SEBI's lens
were the broker Active Finstock Pvt. Ltd., promoters of the company M/s Mazda
Fabrics and managers to the issue of the said company. SEBI was able to
establish an interrelationship between these 3 entities and it looked at their
commonality and their nexus with the promoters of MFPL and held that these were
reason strong enough to hold that trading activity between them was synchronised
and was done with a view to inflate the price/volume of the script of M/s Mazda
In SEBI vs Galaxy Broking Ltd
. , SAT held that a broker's knowledge
of a synchronised trade could be inferred not only from the PQT test of the
trades but also, by the fact that such trades took place several times,
continuously, for several days.
Does Synchronised Trading violate the law?
SAT in SEBI v. Kishore R. Ajmera
(2016)  mentioned that 'Synchronised
Trading per se is not prohibited, and is regulated by SEBI regulations in
India'. In certain cases, the effects of Synchronised trading in creating a
disequilibrium in the market can be severe. Therefore, the parties are held
liable for their actions under Sec. 15-HA of SEBI Act, 1992; Regulation 3 & 4 of
SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to
Securities Market) Regulations, 2005; and Schedule II clause A of Brokers
SAT in Ketan Parekh v. SEBI
(2006)  took the position that – A
synchronised transaction even on the trading screen between genuine parties who
intend to transfer beneficial interest in the trading stock and who undertake
the transaction only for that purpose and not for rigging the market is not
illegal and cannot violate the regulations. As already observed, 'synchronisation'
or a negotiated deal ipso facto is not illegal. [...] Whether a transaction has
been executed with the intention to manipulate the market or defeat its
mechanism will depend upon the intention of the parties which could be inferred
from the attending circumstances because direct evidence in such cases may not
Supreme Court in SEBI v. Rakhi Trading (2018) , held that even if
premeditated synchronised trades don't manipulate the market directly, they are
by themselves undesirable transactions in securities as they go against the
principles of fair play and transparency used in securities trading. It also
pointed out that crucial factors affecting the market integrity, which may be
direct or indirect, can lead to violation of the PFUTP Regulations.
Measures of controlling such trades: India and elsewhere
Synchronised trades are at best a nuisance, and at worst manipulative. As a
result, many stock exchanges and regulators have put in place various barriers
to prevent self trades from taking place at a basic level.
In India, BSE enhanced its existing Self Trade Prevention (STP) mechanism in
October 2015, by putting in place a PAN based order matching filter which tries
to stop such trades on a fundamental level. Some exchanges like NYSE, Euronext,
NASDAQ, have also implemented STP mechanisms that trigger an alert when self
In The UK, Financial Conduct Authority's guidance FCA MAR.1.6.2  defines
Wash trades and emphasises the need for change in beneficial ownership of the
security traded to be established as a Wash trade.
In 2013, The US SEC tabled Financial Industry Regulatory Authority's (FINRA)
proposed rule change governing self trades
up for public comments .
The proposed amendment stated that any self trade executed by the trading
activity of two unrelated algorithms or two distinct trading strategies from the
same firm would be generally considered as bona fide transactions. It also
issued guidelines for members to review their trading activity and have policies
in place to deter self trades originating from their trading desks. It went on
to say that isolated self trades that originated from the same trading
desk/algorithm or related trading desks/algorithms would also be bona fide,
provided that the firm's policies and procedures were well designed.
- Pg 5-6, Joint Staff Report on The U.S. Treasury Market on October 15,
2014, Published July 13 2015
- SAT in SEBI v. Galaxy Broking Ltd. on 11th Jan 2008